2. INTRODUCTION TO MICROECONOMICS
CHAPTER 1
INTRODUCTION TO MICROECONOMICS

3. DEFINITION OF ECONOMICS
Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. OR
Economics is a study of how people use their limited resources to try to fulfill unlimited wants and involves alternatives or choices.

4. MICROECONOMICS VS. MACROECONOMICS
The study of individual parts of the economy, such as public choices, business choices and personal choices.
MACROECONOMICS
The study of the economic system as a whole, such as national income, trade cycle, unemployment rate, inflation and general price level.

5. POSITIVE VS. NORMATIVE ANALYSIS
A positive analysis is to deal with the question of “what is” and no indication of approval or disapproval. It focuses on facts and cause-and-effect relationships.
A normative analysis is to deal with the question of “what ought to be”. It incorporates value judgements about what the economy should be or what policy should be used to achieve economic goals.

6. SCARCITY
CHOICE
BASIC ECONOMIC
CONCEPTS
OPPORTUNITY COST

7. BASIC ECONOMIC CONCEPTS
SCARCITY
One of the important concepts in economics is scarcity.
Scarcity is defined as wants always exceed limited resources to satisfy them.
Scarcity is a universal problem faced by poor as well as rich nations in order to fulfill their needs.

8. BASIC ECONOMIC CONCEPTS (cont.)
CHOICE
When scarcity exists, choices are to be made.
OPPORTUNITY COST
Opportunity cost is defined as the second best alternative that has to be forgone for another choice which gives more satisfaction.

9. BASIC ECONOMIC PROBLEMS
1. WHAT TO PRODUCE?
Refers to the type of goods and services to be produced
2. HOW TO PRODUCE?
Refers to the cheapest method of production
3. FOR WHOM TO PRODUCE?
Refers to the distribution of income

10. PRODUCTION POSSIBILITIES CURVE (PPC)
Used to explain the basic economic concepts: Scarcity, Choices and Opportunity cost.
DEFINITION:
The PPC shows the various possible combinations of goods and services produced within a specified time period with all its resources fully and efficiently employed.

11. PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)
Assumptions:
The economy is operating in full employment and full production capacity (full efficiency).
The amount of resources available are fixed.
The state of technology does not change throughout the production.

12. PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)
Sewing Machine
If it allocates all its resources to sewing machine, it will produce at Point A.
If it allocates all its resources to butter, it will produce at Point F. 16 A 14
The country Jaya, produces two products – butter and sewing machine. C 12
If the country Jaya is at Point C on the PPC, it can produce the combination of 2,000 kg butter and 12,000 units of sewing machine.
Point D shows the production of 3,000 kg butter and 9,000 units of sewing machine. 10 D 8 6 4 2 F 1 2 3 4 5
Butter

13. PRODUCTION POSSIBILITIES CURVE (PPC) (cont.)
Sewing Machine Z 16 A B
Point outside the PPC (Point Z)  SCARCITY
UNATTAINABLE 14 C 12 Y
Any point along the PPC  CHOICES 10 D 8
Movement from one point to another (point C to D)  OPPORTUNITY COST
ATTAINABLE 6
Point inside the PPC (Point Y)  Waste of resources and inefficiency E 4 2 F 1 2 3 4 5
Butter

14. FACTORS THAT INFLUENCE THE SHIFT OF PPC
Sewing Machine
Economic
Growth 16
When the country enjoys economic growth, the PPC bounds outward. 14 12 10 8
When the country is struck by natural disasters, economic growth will decline and the PPC will shift to the left. 6 4 2
Butter 1 2 3 4 5

15. FACTORS THAT INFLUENCE THE SHIFT OF PPC (cont.)
Sewing Machine
2. Improvements
in Technology 16
Technology increases the production of sewing machine. 14 12
Technology increases the production of butter. 10 8 6 4 2
Butter 1 2 3 4 5

16. FACTORS THAT INFLUENCE THE SHIFT OF PPC (cont.)
Sewing Machine
3. Population 16 14
Increase in population 12 10 8
Decrease in population 6 4 2
Butter 1 2 3 4 5

17. SHAPE OF PPC PPC IS CONCAVE Sewing Machine 16 14 12 10 8 6 4 2 Butter
Increasing Opportunity Cost 12 10 8 6 4 2
Butter 1 2 3 4 5

18. SHAPE OF PPC (cont.) PPC IS CONVEX Sewing Machine 16 14 12 10 8 6 4 2
Decreasing Opportunity Cost 10 8 6 4 2
Butter 1 2 3 4 5

19. SHAPE OF PPC (cont.) PPC IS LINEAR Sewing Machine 16 14 12 10 8 6 4 2
Constant Opportunity Cost 10 8 6 4 2
Butter 1 2 3 4 5

20. TYPES OF ECONOMIC SYSTEM
MIXED ECONOMY
ISLAMIC ECONOMY
SOCIALISM
CAPITALISM

21. TYPES OF ECONOMIC SYSTEM
CHARACTERISTICS
CAPITALISM
An economic system where individuals and sellers
make economic decisions using a price system
MERITS AND DEMERITS

22. CHARACTERISTICS Private ownership of resources
Freedom of enterprise and choice
Consumers’ sovereignty
High competition
Government intervention
Price mechanism

23. MERITS DEMERITS Production according to consumers’ needs
Economic freedom
Efficient utilization of resources
Variety of consumer goods
Enhanced trade, business and R&D
Automatic incentives
Flexibility
Inequality of distribution of wealth and income
Inflation and high unemployment rate
Lack of social welfare
Wasteful competition
Misallocation of resources
Social cost

24. TYPES OF ECONOMIC SYSTEM
CHARACTERISTICS
SOCIALISM
An economic system where all the economic decisions
are made by the government or a central authority
MERITS AND DEMERITS

25. CHARACTERISTICS Public ownership of resources
Central planning authority
Price mechanism is less important
Central control and ownership

26. MERITS DEMERITS Production according to basic need
Equal distribution of income and wealth
Better allocation of resources
No serious unemployment or inflation
Rapid economic development
Social welfare
Lack of incentives and initiative by individuals
Loss of economic freedom and consumer sovereignty
Absence of competition
Waste of economic resources